A New Multi-Dimensional Framework for Analyzing Regional Integration: Regional Integration Evaluation (RIE) Methodology

ADB Working Paper Series on Regional Economic Integration

Donghyun Park and Mario Arturo Ruiz Estrada No. 49 | May 2010

ADB Working Paper Series on Regional Economic Integration

A New Multi-Dimensional Framework for Analyzing Regional Integration: Regional Integration Evaluation (RIE) Methodology

Donghyun Park+ and Mario Arturo +Donghyun Park is Principal Economist, Economics Ruiz Estrada++ and Research Department, Asian Development Bank, 6 ADB Avenue, Mandaluyong City, 1550 Metro Manila, Philippines. No. 49 May 2010 Tel +63 2 632 5825, Fax +63 2 636 2342, [email protected] ++Mario Arturo Ruiz Estrada is Lecturer and Researcher, Faculty of Economics and Administration, University of Malaya. [email protected]

The ADB Working Paper Series on Regional Economic Integration focuses on topics relating to regional cooperation and integration in the areas of infrastructure and software, trade and investment, money and finance, and regional public goods. The Series is a quick-disseminating, informal publication that seeks to provide information, generate discussion, and elicit comments. Working papers published under this Series may subsequently be published elsewhere.

Disclaimer:

The views expressed in this paper are those of the author and do not necessarily reflect the views and policies of the Asian Development Bank or its Board of Governors or the governments they represent.

The Asian Development Bank does not guarantee the accuracy of the data included in this publication and accepts no responsibility for any consequence of their use.

Use of the term ―country‖ does not imply any judgment by the authors or the Asian Development Bank as to the legal or other status of any territorial entity.

Unless otherwise noted, $ refers to US dollars.

...... Contents Abstract iv

1. Introduction 1 2. RIE Methodology: An Illustration From Inter-Korean Unification 2 3. Application of The RIE Methodology To Different Trade Blocs 7 3.1 European Union (EU): High Regional Development and High Regional Integration 7 3.2 NAFTA: High Regional Development and Economics-Focused Regional Integration 9 3.3 ASEAN: Low Regional Development and Low Regional Integration 11 3.4 MERCOSUR: Rapid Regional Development and Slow Regional Integration 12 4. Concluding Remarks 14 References 16 . . ADB Working Paper Series on Regional Economic Integration 18

Tables

1. Multi-Input Database Table, Global Political Development 3 2. Global Political Development of the Republic of Korea and

the Democratic People’s Republic of Korea in the 1970s 4 .

3. EU’s Political, Social, Economic and Technological

Development and Regional Integration Stage (RIS) Index 8 . . . . . 4. NAFTA’s Political, Social, Economic and Technological Development and Regional Integration Stage (RIS) Index 10 5. ASEAN’s Political, Social, Economic and Technological Development and Regional Integration Stage (RIS) Index 12 6. MERCOSUR’s Political, Social, Economic and Technological Development and Regional Integration Stage (RIS) Index 13

Figures 1. Global Overall Development of the Republic of Korea and the Democratic People’s Republic of Korea in the 1970s 5 2. Global Development Stage of the Republic of Korea and the Democratic People’s Republic of Korea in the 1970s 6 3. The Regional Integration Stage (RIS) Index, EU in the 1980s 9

Abstract

Theories of regional integration typically analyze the regional integration process from the perspective of a single discipline, usually economics. However, such one- dimensional analytical frameworks cannot fully capture the richness and complexity of the inherently multi-dimensional regional integration process. To address the problem, we propose the regional integration evaluation (RIE) methodology which is based on four dimensions of development – economic, political, social and technological. The central idea behind the RIE methodology is that regional development promotes regional integration. Our RIE methodology differs from the existing literature in that it is based on a more comprehensive definition of development than just economic development. Our definition of a region's development incorporates the development levels of all regional countries as well as differences in development levels among regional countries. We apply the RIE methodology to assess the regional development and hence integration prospects of NAFTA, ASEAN, MERCOSUR and EU.

Keywords: Economic integration, economic modeling, NAFTA, ASEAN, MERCOSUR, EU

JEL Classification: F15

A New Multi-Dimensional Framework for Analyzing Regional Integration: Regional Integration | 1 Evaluation (RIE) Methodology

1. Introduction

Research on regional integration has engendered a wide range of theories, models and methodologies. Most of the existing theories, models and research methodologies on regional integration are based on the perspectives of a single discipline, most often economics.1 In this paper, we approach regional integration from a multi-disciplinary perspective which incorporates not only economics but also the political, social and technological dimensions of integration.2 More specifically, we introduce a new multidimensional analytical framework – the regional integration evaluation (RIE) methodology – which is based on all four dimensions of development. Our measure of a region’s development level in the economic, political, social and technological spheres is the regional development index Xi. The index incorporates the development levels of all regional countries as well as differences among the regional countries. For example, ASEAN’s economic development index measures ASEAN’s economic development level, which, in turn, depends on the economic development levels of all its member countries. Wide gaps in economic development levels among member countries, say between Singapore and Cambodia, reduce ASEAN’s economic development index.

The central idea behind the RIE methodology is that regional development promotes regional integration. That is, the higher the development level of a region, the more likely it is that the countries of the region will experience closer integration with each other. The development level of a region, in turn, depends on the domestic development level of each country in the region. While the idea that regional development is beneficial for regional integration is hardly new, our RIE methodology differs from the existing literature in that it is based on a more comprehensive definition of development than just economic development. A high level of regional economic development is certainly conducive for integration since it allows for more trade, investment and other economic interaction among its member countries. However, it is equally clear that a high level of development in non-economic spheres is also conducive for integration. For example, regional integration is more likely to occur among well-functioning democracies than among countries with less mature and stable political systems. This explains why Western European countries, which are not only highly developed economically but also politically and in other spheres, have reached the highest level of regional integration in the world today.

Furthermore, regional integration not only involves the progressive removal of barriers to economic interaction among members, it draws them closer together in non-economic spheres as well. As such, not only can we expect high levels of regional economic and non-economic development to promote regional integration, we can also expect regional

1 Please refer to Jovanovic (2006), Robson (2006), Fratianni (2006), Das (2004) and El-Agraa (1989) for comprehensive discussions of regional economic integration. 2 Although the vast majority of the literature on regional integration addresses regional economic integration, there are some papers which look at the political, social and technological dimensions of integration. For example, (i) Schiff and Wang (2003) explore technology diffusion under NAFTA, (ii) Duina (2006) examines the social aspects of regional integration in the EU, NAFTA and MERCOSUR, (iii) Marsh (2006) looks at the relationship between political liberalization and regionalism in East and Southeast Asia, and (iv) Capannelli, Lee and Petri (2009) look at similarity of political institutions and culture among East Asian countries.

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integration to promote both economic and non-economic development of a region. For example, the widely cited economic benefits of integration, such as greater trade and investment among member countries, can stimulate the region’s economic growth, and indeed higher growth has been a major driving motivation behind most regional integration initiatives. Integration can also bring member countries closer together in terms of their political, social, technological and environment, for example by promoting the adoption of common labor or environmental standards. As evident from the EU's experience, such broader integration, as opposed to narrowly economic integration, can significantly reduce the risk of tension and violent conflict among member states. There is thus a mutually supportive and reinforcing relationship between regional development and regional integration. We believe that our RIE methodology can provide more accurate and comprehensive guidance for both policymakers and researchers about the feasibility and desirability of regional integration initiatives than traditional methodologies. While our methodology recognizes that both economic and non-economic factors drive regional integration, the traditional methodologies tend to focus narrowly on economic motivations. In addition, our methodology takes into account the fact that integration entails both economic and non-economic effects.

2. RIE Methodology: An Illustration from Inter-Korean Unification

In this section, we illustrate the RIE methodology using the example of unification between the two Koreas. The main objective of the RIE model is to provide policymakers and researchers a new analytical tool to study the evolution of any regional integration process from a global perspective encompassing the political, social, economic and technological dimensions.3 The simple and flexible model is based on a group of indexes and graphs, and it can be applied to any case of regional integration. The model involves four basic phases. The first phase is the design of the multi-input database table. The second phase is the measurement of individual Regional Global Development Indexes (Xi), which include the Regional Global Political Development Index (X1), Regional Global Social Development Index (X2), Regional Global Economic Development Index (X3) and Regional Global Technological Development Index (X4). The third phase is the measurement of the Regional Global Development (RGD) index. The last phase is the measurement of Regional Integration Stage (RIS) index.

Let us now discuss each of the four basic phases, beginning with the design of the multi- input database table. Table 1 below is an example of the multi-input database table and shows global regional political development. Global refers to the multidimensional nature of political development and is represented by a wide range of political variables. Regional refers to the specific region of interest to the research. Therefore, in our case, global regional political development refers to the political development of the two Koreas as measured by the 15 political variables in Table 1. There is no reason why the number of variables in a multi-input database table should be constant and it can vary according to the objectives of the research and data availability. We can similarly

3 For a full description of the model, please refer to Ruiz (2004). The paper is available from the authors upon request.

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construct multi-input database tables for global regional economic, social and technological development.

Table 1: Multi-Input Database Table, Global Political Development

CODE POLITICAL FACTORS

P.1. External factors P.1.1. Colonization (country) P.1.2. Group negotiation power P.1.3. Foreign policy influences P.1.4.1. Regional P.1.4.2. Global P.1.5. Negotiation style

P.2. Internal factors P.2.1. International organizations support P.2.3. Political regime P.2.4. Legislative background P.2.5. Internal security P.2.6. Human rights P.2.7. Border problems P.2.8. Political stability P.2.9. Political structure and public administration P.2.10. Army size P.2.11. Bureaucracy level

Source: Authors’ estimates.

The second phase of the RIE model is to measure the Global Development Indexes (Xi) using the variables in the four multi-input database tables described above. The four Global Development Indexes are the Global Political Development Index (X1), Global Social Development Index (X2), Global Economic Development Index (X3) and Global Technological Development Index (X4). The data we input for each country in the region – in our case, the Democratic People’s Republic of Korea and the Republic of Korea are the countries and Korea is the region – are based on statistical and historical data. Furthermore, all our data are binary – i.e. either 1 or 0 – and determined by either quantitative or qualitative criteria. A big reason for using binary data is that we attach the same level of importance to all the variables in our multi-input database tables. Another reason for using binary data is that it allows us to analyze countries with limited data, such as the Democratic People’s Republic of Korea.

Table 2 below is an example of a multi-input database table with binary data inputted, and it shows the global political development of the Republic of Korea, and the Democratic People’s Republic of Korea in the 1970s. For example, the value for the

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variable ―political regime‖ is 1 if the country is democratic and 0 if the country is non- democratic. Therefore, as the last two columns show, the value is 1 for the Republic of Korea and 0 for the Democratic People’s Republic of Korea. Similarly, the value of the variable ―human rights‖ is 1 if a country’s protection of human rights is strong and 0 if it is weak. This is why we input 1 for the Republic of Korea and 0 for the Democratic People’s Republic of Korea. The total for the Republic of Korea is 7 or 47 % since there are 15 variables and the total for the Democratic People’s Republic of Korea is 1 or 7%. The global political development of the Republic of Korea and the Democratic People’s Republic of Korea in the 1970s is thus 47% and 7%, respectively.

Table 2: Global Political Development of the Republic of Korea and the Democratic People’s Republic of Korea in the 1970s

The Republic The Democratic People’s CODE POLITICAL FACTORS of Korea Republic of Korea

P.1. External factors P.1.1. Colonization (country) 0 0 P.1.2. Group negotiation power 1 0 P.1.3. Foreign policy influences P.1.4.1. Regional 1 0 P.1.4.2. Global 0 0 P.1.5. Negotiation style 1 0

P.2. Internal factors P.2.1. International organizations support 1 0 P.2.3. Political regime 1 0 P.2.4. Legislative background 0 0 P.2.5. Internal security 1 1 P.2.6. Human rights 1 0 P.2.7. Border problems 0 0 P.2.8. Political stability 0 0 P.2.9. Political structure and public 0 0 administration P.2.10. Army size 0 0 P.2.11. Bureaucracy level 0 0

TOTAL 7 1 TOTAL (%) 47 7

Source: Authors’ estimates.

We can similarly input binary data for all the variables in the multi-input database tables for social, economic and technological development of the two Koreas in the 1970s.4 We find the global social development of the Republic of Korea and the Democratic People’s Republic of Korea in the 1970s to be 57% and 29%, the global economic development of

4 The binary variables for social, economic and technological development are, of course, different from the binary variables for political development.

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the Republic of Korea and the Democratic People’s Republic of Korea in the 1970s to be 40% and 14%, and the global technological development of the Republic of Korea and the Democratic People’s Republic of Korea in the 1970s to be 60% and 30%.

The third phase of the RIE model is to use the four Global Development Indices (Xi) we found in the model’s second phase – i.e. political, social, economic and technological – to estimate the Global Overall Development Index (X), which sums up the information contained in the four indices. Intuitively, the Global Overall Development Index (X) measures a country’s overall level of development from a multidimensional or global perspective encompassing political, social, economic and technological development. Furthermore, as we saw earlier, we measured political, social, economic and technological development themselves from a multidimensional or global perspective, using a wide range of variables relevant to the development of each sphere.

The first step in estimating the Global Overall Development Index (X) is to plot the values of the four Global Development Indices (Xi), as shown in Figure 1 below. This graph will help to illustrate how we compute X. Graph 1 consists of four different triangular areas – each bounded by the values of two of the four global development indices – for the Republic of Korea, the Democratic People’s Republic of Korea and the Koreas. Let us define the triangular area between the political and social axes as A1, social and economic axes as A2, economic and technological axes as A3, and technological and political axes as A4. Each area has a maximum value of 0.25 and the total value of the four areas is 1. Figure 1 Figure 1:Global Global Overall Overall Development Development of South Korea of and the North Republic Korea of Korea and the Democratic People’sin the 1970s Republic of Korea in the 1970s

POLITICAL

60%

50% 47%

40%

30%

20%

10% 57% 29% TECHNOLOGICAL SOCIAL 0% 60% 30% 14%

40%

ECONOMIC

The Republic The People’s Democratic of Korea SK RepublicNK of Korea

Source: Authors’ estimates.

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We compute the overall global development index (X) as the sum of the four areas – A1, A2, A3 and A4. In computing A1, it is useful to think of the value of the Global Political Development Index (X1) as the base and the value of the Global Social Development Index (X2) as the height. We compute A1 by first multiplying X1 and X2, and then dividing their product by four. Similarly, we can compute A2, A3 and A4 by doing the same with the pairs (X2, X3), (X3, X4) and (X4, X1), respectively. For example, for the Republic of Korea, A1 is 6.7% since X1 is 47% and X2 is 57%. Likewise, we compute A2, A3 and A4 for the Republic of Korea to be 5.7%, 6% and 7.05%. Therefore, the Republic of Korea’s overall global development index (X) is 25%. We can similarly compute X for the Democratic People’s Republic of Korea as 3%. Therefore, in the 1970s, the Republic of Korea’s overall development level was about eight times higher than that of the Democratic People’s Republic of Korea.

The fourth and final phase of the RIE model is to use the four Global Development Indices (Xi) and coefficients to measure the Global Development Stage (Y) of the Republic of Korea and the Democratic People’s Republic of Korea. The coefficient indicates the relative importance of the political, social, economic and technological dimensions, and sum up to one. For example, if we attach equal importance to the four dimensions, the coefficient for each dimension is 0.25. To obtain the Global Development Stage (Y), we first multiply the Global Development Index (Xi) with the corresponding coefficient – for example, the Global Political Development Index (X1) and the political coefficient – and then sum up the four products. Assuming that each of the four coefficients is 0.25, so that the four dimensions are equally important, we can compute the Global Development Stage (Y) for the Republic of Korea and the Democratic People’s Republic of Korea as 51% and 20%, respectively, in the 1970s. The large gap in Y between the Republic of Korea and the Democratic People’s Republic of Korea indicates a large gap between the two countries in terms of overall development. Figure 2 below provides a graphical representation of Global Development Stage (Y). The height corresponds to Y and the quadrangular area inside the dotted lines corresponds to the Overall Global Development Index (X).

Figure 2: Global Development Stage of the Republic of Korea and the Democratic People’s Republic of Korea in the 1970s

Source: Authors’ estimates.

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The Global Development Stage (Y) is broadly similar to the Global Overall Development Index (X) since both reflect the overall development level of a country or a region. We define a value of Y between 0% and 33% as the underdeveloped stage, 34% and 66% as the developing stage, and 67% and 100% as the developed stage. Therefore, in the 1970s, the Republic of Korea was in the developing stage whereas the Democratic People’s Republic of Korea was in the underdeveloped stage. We should note that Y is more flexible than X in the sense that it allows us to attach any combination of relative weights to the political, social, economic and technological dimensions. For example, if we attach more importance to the political dimension than the other dimensions, the political coefficient may be 0.40 while the social, economic and technological coefficients may each be 0.20. More generally, we can flexibly vary the relative sizes of the four coefficients to suit our needs.

3. Application of the RIE Methodology to Different Trade Blocs

In this section, we apply the RIE methodology to different trade blocs – European Union (EU), North American Free Trade Area (NAFTA), Association of Southeast Asian Nations (ASEAN) and Market of the South Cone (MERCOSUR) – to estimate their regional development levels. 5 The four trade blocs encompass a wide range of geographical locations as well as economic, political, social and technological structures. Applying the RIE methodology to such a diverse group of regions and comparing their development levels enables us to have a clearer picture of the effect of regional development on regional integration. We also look at how the regional development of each trade bloc has evolved over time so as to evaluate whether its integration prospects have become stronger or weaker over time. More specifically, we estimate and compare the regional development level in 3 different time periods – 1980s, 1990s and 2000-2009. Our application of the RIE methodology allows us to compare the prospects for integration among different groups of countries as well as the evolution of those prospects over time.

3.1 European Union (EU): High Regional Development and High Regional Integration

The European Union (EU) was established as the European Economic Community in 1957 and represents the most advanced form of regional integration in the world today.6 Geopolitical factors, in particular the strong political commitment of Western European governments to prevent another military conflict in the aftermath of the devastating Second World War, provided a powerful initial impetus for regional integration. An equally powerful impetus came from a common desire of Western European countries to achieve more rapid economic growth by reducing barriers to trade and thus promoting

5 A comprehensive explanation of the RIE methodology to the four trade blocs, including the full list of variables we use to measure economic, political, social and technological development level is available from the authors upon request. 6 Please refer to Molle (2006) and Dinan (2005) for comprehensive overviews of the EU.

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trade with each other. The convergence of powerful geopolitical and economic self- interest has led to a deepening and broadening of integration unparalleled by any other regional group in the world. The depth of EU integration is epitomized by the euro, the common currency shared by 16 member states, while the breadth of integration is perhaps best illustrated by the steady expansion of membership from six to twenty- seven. The EU is in many ways a unique supranational and intergovernmental organization.

Table 3 below shows the evolution of the EU’s regional development indices in the 7 1980s, 1990s and 2000-2009. The regional political development index (X1) rose slightly from 0.80 in the 1980s to 0.81 in the 1990s before falling to 0.75 during 2000- 2009. The regional social (X2), economic (X3) and technological (X4) regional development index all show the same pattern of (i) a slight increase between the 1980s and the 1990s and (ii) a somewhat bigger decrease between the 1990s and 2000-2009. The most striking feature of Table 3 is EU’s high level of regional development in all 4 spheres – political, social, economic and technological. This is not surprising since the EU consists of high-income countries with relatively homogenous social and political values as well as technological capabilities. The column to the right of each of the 4 regional development index corresponds to the triangular area used to compute the regional integration stage (RIS) index, which is a measure of overall regional development incorporating all 4 spheres.8 The larger a particular development index, the larger the corresponding triangular area. The pattern of the RIS index is similar to the 4 development indices – rising from 81 in the 1980s to 83 in the 1990s before falling to 78 in 2000-2009. Figure 3 below shows the graphical illustration of the 4 regional development indices, the corresponding triangular areas, and the RIS index during the 1980s for the EU.

Table 3: EU’s Political, Social, Economic and Technological Development and Regional Integration Stage (RIS) Index

Period RPD Area RSD Area RED Area RTD Area RIS

1980s 0.80 20 0.71 17.75 0.83 20.75 0.88 22 81 1990s 0.81 20.25 0.78 19.5 0.85 21.25 0.89 22.25 83

2000-2009 0.75 18.75 0.73 18.25 0.80 20 0.85 21.25 78

Note: RPD = regional political development, RSD = regional social development, RED = regional economic development, RTD =Figure regional technological3: Graphical developm Illustrationent, RIS = regional of the integration 4 Regional stage index. Development Indices and Source: Authors’ estimates.

7 Please refer to Ruiz and Park (2007) and Ruiz (2004) for a comprehensive overview of the derivation of the regional development index. 8 For example, in the 1980s, 20 is the triangular area associated with the regional political development index of 0.8. In computing the RIS index, we can vary the weights we assign to political, social, economic and technological development. In this paper, we have assigned equal weights to the four different dimensions of development. The RIS index is simply the sum of the 4 triangular areas. Please refer to Ruiz and Park (2007) and Ruiz (2004) for a more comprehensive discussion of deriving the RIS index.

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Figure 3: The Regional Integration Stage (RIS) Index, EU in the 1980s

Technological (X4) Political (X1)

0.88 0.80

Economic (X ) 3 0.71 Social (X ) 0.83 2

Source: Authors’ estimates.

A major development within the EU during 2000-2009 was the accession of new members with lower levels of political, social, economic and technological developments. More specifically, in 2004 Cyprus, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Slovakia, Slovenia and the Czech Republic joined the EU. Except for Cyprus and Malta, all the new members were formerly communist countries making the transition from centrally planned economies to market-based economies and authoritarian political systems to liberal multi-party democracies. The reduction in the 4 regional development indices between the 1990s and 2000-2009, along with the RIS index, is a natural consequence of the entry of ten less developed new members. However, what is more significant is that even after absorbing ten new members, the EU remains highly developed politically, socially, economically and technologically. Although the development gap between the old and new members has made the EU more heterogeneous, such heterogeneity has not significantly reduced its overall development level. This suggests that despite the recent membership expansion, the EU remains a viable and forceful mechanism for European integration. Going forward, our analysis implies that the entry of Romania and Bulgaria in 2007, as well as the future prospective entry of Turkey and some Balkan countries, is unlikely to adversely affect the sustainability of the EU. Nevertheless, in many EU countries there has been a political backlash against the expansion of the EU.

3.2 NAFTA: High Regional Development and Economics-Focused Regional Integration

The North American Free Trade Agreement (NAFTA) came into effect on 1 January 1994 and established a North American free trade area consisting of the United States,

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Canada and Mexico.9 The free trade area is the world’s largest in terms of the combined economic size, larger than even the EU. Unlike the EU, which addresses a wide range of economic and non-economic issues, NAFTA is a purely economic agreement which seeks to boost trade among the three countries by reducing trade barriers, in particular tariffs. The formation of NAFTA was driven by a common desire to make the North American markets more efficient, and thereby promote the international competitiveness and economic welfare of the three countries. Unlike the EU, NAFTA did not create any supranational organizations such as the European Commission. In the context of their roles as trade blocs, the US, Canada and Mexico pursue different trade policies with respect to non-NAFTA countries. In contrast, the EU is a customs union in which all EU members pursue the same trade policies vis-à-vis non-EU countries.

Table 4 below shows the evolution of NAFTA’s regional development indices in the 1980s, 1990s and 2000-2009. The regional political development index (X1) rose slightly from 0.65 in the 1980s to 0.67 in the 1990s and further to 0.70 during 2000-2009. The regional social development index (X2) shows a much sharper rise, from 0.48 in the 1980s to 0.76 in the 1990s and during 2000-2009. The regional economic development index (X3) rose from 0.74 in the 1980s to 0.82 in the 1990s and further to 0.85 during 2000-2009. Finally, the increase in the regional technological development index (X4) is smaller, rising from 0.90 in the 1980s to 0.93 in the 1990s and 2000-2009. Table 4 indicates that relative to the pre-NAFTA period, the NAFTA bloc has become more developed politically, socially, economically and technologically. The progress in regional development has been especially pronounced in the social, and to a lesser extent, economic spheres. The regional integration stage (RIS) index rose from 69 in the 1980s to 80 in the 1990s and 81 in 2000-2009.

Table 4: NAFTA’s Political, Social, Economic and Technological Development and Regional Integration Stage (RIS) Index

Period RPD Area RSD Area RED Area RTD Area RIS

1980s 0.65 16.25 0.48 12 0.74 18.5 0.90 22.5 69 1990s 0.67 16.75 0.76 19 0.82 20.5 0.93 23.25 80 2000-2009 0.70 17.5 0.76 19 0.85 21.25 0.93 23.25 81

Note: RPD = regional political development, RSD = regional social development, RED = regional economic development, RTD = regional technological development, RIS = regional integration stage index. Source: Authors’ estimates.

Our application of the RIE methodology to NAFTA indicates that conditions are becoming more conducive for broader and deeper integration among the US, Mexico and Canada. Indeed we find that the RIS index is higher for NAFTA than the EU. The balance of evidence suggests that NAFTA has served as a major catalyst of trade and investment in all three countries. In particular, NAFTA seems to have been beneficial for

9 Please refer to Hufbauer and Schott (2005) and Cameron and Tomlin (2000) for comprehensive overviews of NAFTA.

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the economic growth of Mexico, which considerably lags behind its two northern neighbors in per capita income and overall development. Although Mexico’s post-1994 growth performance has been neither striking nor fast enough to permit convergence with the US and Canada, it would have been even less impressive without the benefits of NAFTA – greater access to the two rich markets and higher FDI inflows attracted by such access. Although various structural obstacles, for example political opposition in the US to Mexican immigration, stand in the way of deeper integration, our analysis lends support to those who argue that NAFTA should now aspire to become more than just a free trade area.

3.3 ASEAN: Low Regional Development and Low Regional Integration

The Association of Southeast Asian Nations (ASEAN) was established in 1967 by Indonesia, Malaysia, Philippines, Singapore and Thailand, and its membership has expanded over time to include Viet Nam, Myanmar, Cambodia, Lao PDR and Brunei Darussalam.10 ASEAN was formed by a group of pro-Western, anticommunist countries at the height of the Cold War against the backdrop of the Viet Nam War. As such, ASEAN was initially driven by geopolitical considerations and served primarily as a forum for fostering dialogue and cooperation on political and security issues. More specifically, ASEAN sought to build up a united front against the communist threat and to defuse potential conflict among its members. Although the initial impetus for ASEAN came from geopolitics rather, promoting trade, investment and other economic cooperation has become increasingly more important in line with the region’s rapid economic growth. Southeast Asia has been part and parcel of the East Asian Miracle which transformed the region from an economic backwater to the most dynamic component of the global economy. The end of the Cold War has further accelerated the strategic shift in ASEAN’s focus from geopolitical cooperation to economic cooperation. A concrete example of this strategic shift is the ASEAN Free Trade Area initiative, which was launched in 1992 to reduce trade and non-trade barriers among members.

Table 5 below shows how ASEAN’s regional development indices have evolved over time. The regional political development index (X1) rose sharply from 0.23 in the 1980s to 0.33 in the 1990s before falling marginally to 0.32 during 2000-2009. The regional social development index (X2) also rises sharply from 0.37 in the 1980s to 0.46 during the 1990s before falling back to 0.40 during 2000-2009. The regional economic development index (X3) rose from 0.36 in the 1980s to 0.41 in the 1990s and during 2000-2009. The increase in the regional technological development index (X4) is larger, rising from 0.22 in the 1980s to 0.51 in the 1990s and 0.52 during 2000-2009. Table 5 reveals that ASEAN became more developed politically, socially, economically and technologically between the 1980s and the 1990s. However, by and large there has been almost no progress in ASEAN’s development between the 1990s and 2000-2009. The regional integration stage (RIS) index shows a similar trend, rising from 30 in the 1980s to 43 in the 1990s before falling to 41 during 2000-2009.

10 Please refer to Tarling (2006) and Plummer (2006) for comprehensive overviews of ASEAN.

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Table 5: ASEAN’s Political, Social, Economic and Technological Development and Regional Integration Stage (RIS) Index

Period RPD Area RSD Area RED Area RTD Area RIS

1980s 0.23 5.75 0.37 9.25 0.36 9 0.22 5.5 30 1990s 0.33 8.25 0.46 11.5 0.41 10.25 0.51 12.75 43 2000-2009 0.32 8 0.40 10 0.41 10.25 0.52 13 41

The progress in political, social, economic and technological development between the 1980s and the 1990s closely mirrors ASEAN’s remarkable economic growth and development from 1980 to 1997. The aftereffects of the Asian currency crisis of 1997- 1998, which put a rude stop to the region’s seemingly unstoppable march toward prosperity, are reflected in the lack of development progress between the 1990s and 2000-2009. The low level of regional development is primarily due to a great deal of income heterogeneity within ASEAN, which includes some of the world’s poorest countries as well as one of the richest – Singapore. While intra-ASEAN trade is not negligible, its relative importance falls far short of trade with non-ASEAN countries for all ASEAN members. Likewise, one of the guiding principles of ASEAN – non-interference in the internal affairs of other members – has prevented ASEAN countries from collectively pushing for political reform. In short, the low level of regional development has prevented ASEAN from becoming an effective vehicle for regional integration. Our analysis suggests that at this point in time it may be more productive for ASEAN to consolidate its existing scope and level of integration rather than seek to horizontally or vertically expand its integration. One possible strategy for ASEAN going forward is to first strengthen integration among relatively more developed members before doing the same for all members.

3.4 MERCOSUR: Rapid Regional Development and Slow Regional Integration

MERCOSUR, or Common Market of the South, was set up in 1991 by Argentina, Brazil, Paraguay and Uruguay, and is South America’s leading trade bloc. 11 MERCOSUR’s combined market accounts for around 70% of the continent’s output, and its stated aim is to create a customs union with common external tariffs against non-members and free trade within the bloc. The main driver behind the formation of the South American common market was the shared desire of the continent’s two largest economies – Argentina and Brazil – to intensify their economic interaction as a means of enhancing efficiency, productivity and international competitiveness. Both countries were very much part of the Latin American debt crisis in the early 1980s, which led to macroeconomic instability and slow growth throughout the decade, so much so that the 1980s is widely known as the region’s ―lost decade‖ from the economic perspective. Along with sounder

11 Please refer to Preusse (2004) and Folders (2000) for comprehensive overviews of MERCOSUR.

A New Multi-Dimensional Framework for Analyzing Regional Integration: Regional Integration | 13 Evaluation (RIE) Methodology

macroeconomic policies and structural reform, Argentina and Brazil viewed greater regional trade as an important potential channel for recovering from the lost decade and speeding up growth. Geographical proximity and economic linkages with the two giants made Paraguay and Uruguay natural additional partners to the trade bloc. A major contributing political factor is the fact that the debt crisis and its adverse effects on economic performance have discredited the region’s authoritarian military governments, which paved the way for their replacement by democratic civilian governments more willing to cooperation with other countries.

Table 6 below shows the evolution of MERCOSUR’s regional development indices in the 1980s, 1990s and 2000-2009. The regional political development index (X1) rose sharply from 0.11 in the 1980s to 0.44 in the 1990s and further to 0.52 during 2000-2009. The regional social development index (X2) also rose sharply from 0.36 in the 1980s to 0.46 in the 1990s and more moderately to 0.50 during 2000-2009. The regional economic development index (X3) rose from 32 in the 1980s to 0.41 in the 1990s and further to 0.48 during 2000-2009. The increase in the regional technological development index (X4) has also been pronounced, rising from 0.23 in the 1980s to 0.51 in the 1990s and further to 0.55 during 2000-2009. Table 6 reveals that during the post-MERCOSUR period, the MERCOSUR bloc has made a great deal of progress in political, social, economic and technological development as well as overall development. The regional integration stage (RIS) index rose from 26 in the 1980s to 46 in the 1990s and further to 51 during 2000-2009.

Table 6: MERCOSUR’s Political, Social, Economic and Technological Development and Regional Integration Stage (RIS) Index

Period RPD Area RSD Area RED Area RTD Area RIS

1980s 0.11 2.75 0.36 9 0.32 8 0.23 5.75 26 1990s 0.44 11 0.46 11.5 0.41 10.25 0.51 12.75 46 2000-2009 0.52 13 0.50 12.5 0.48 12 0.55 13.75 51

Our application of the RIE methodology to MERCOSUR indicates that between the 1980s and the 1990s conditions have become much conducive for integration among the four South American countries. In particular, the substantial improvement in the macroeconomic performance of Argentina and Brazil as well as their political transformation into multi-party democracies has strengthened intra-MERCOSUR political and economic integration. The empirical evidence also indicates that during the 1990s the reduction of tariff and non-tariff trade barriers under MERCOSUR was effective in expanding trade among the four members and serving as an engine of regional growth. However, during 2000-2009, regional integration has failed to keep pace with regional development. In fact, further integration has stalled in the face of growing protectionism

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within the region, which was initially precipitated by currency devaluations and economic stagnation of 1999-2002. Our analysis suggests that the region’s development has continued to move forward despite those temporary setbacks. Therefore, instead of erecting more trade barriers against each other and moving away from the ideal of a customs union, the four MERCOSUR governments should work hard to get regional integration back on track in light of the development progress between 1990s and 2000- 2009.

4. Concluding Remarks

In this paper, we introduce a new multi-disciplinary analytical framework – the regional integration evaluation (RIE) methodology – for analyzing regional integration. The methodology is based on the recognition that regional integration is not a narrowly economic phenomenon, but a much broader phenomenon which also includes political, social and technological dimensions. That is, integration not only involves reducing barriers to trade, investment and other cross-border economic activities, but also facilitating cooperation in other areas as well. As such, the pre-conditions for successful integration include both economic and non-economic factors. The central idea behind the RIE methodology is that (i) regional development should be defined broadly to encompass political, social, economic and technological development, and (ii) regional development is conducive for regional integration. It is likely that a group of highly developed and homogeneous countries will be able to pursue integration more effectively than a group of less developed and heterogeneous countries. Furthermore, we can expect regional integration to promote regional development, which means there is a complementary relationship between regional development and regional integration, one supporting the other.

To illustrate its practical usefulness for policymakers, we applied the RIE methodology to the European Union (EU), North American Free Trade Area (NAFTA), Association of Southeast Asian Nations (ASEAN) and Market of the South Cone (MERCOSUR) to estimate the regional development levels of four geographically dispersed trade blocs which differ widely in terms of their economic, political, social and technological characteristics. We also apply the RIE methodology for three different time periods – the 1980s, the 1990s and 2000-2009 – to track the evolution of each bloc’s regional development level over time. Broadly speaking, we can characterize the regional development and integration levels of the four blocs as follows: (1) EU – high regional development and high regional integration, (2) NAFTA – high regional development and economics-focused regional integration, (3) ASEAN – low regional development and low regional integration, and (4) MERCOSUR – rapid regional development and slow regional integration. Our analysis not only allows for a comparison of different trade blocs but also captures the impact of major economic and non-economic shocks on the evolution of regional development over time. For example, the entry of less developed new members from Central and Eastern Europe in the past few years has reduced the EU’s development level. Likewise, South America’s strong and sustained economic recovery from the lost decade of the 1980s has lifted up MERCOSUR’s development level.

A New Multi-Dimensional Framework for Analyzing Regional Integration: Regional Integration | 15 Evaluation (RIE) Methodology

Our application of the RIE methodology yields estimates of the regional integration stage (RIS) index, which is a measure of a region’s overall development. Those estimates provide practical, useful and relevant information to policymakers, especially in terms of whether or not to strengthen integration through either broadening or deepening. Our analysis implies that conditions are now conducive for NAFTA to seek higher levels of integration by expanding into new fields of integration and/or further deepening the existing, economics-focused integration. Our analysis also suggests that at this point in time consolidating the current level of integration makes more strategic sense for ASEAN than broadening or deepening. We find that regional integration has failed to keep pace with regional development in the case of MERCOSUR, which means that policymakers should give seriously consider pursuing integration with renewed vigor and commitment. The decrease in the EU’s development level due to the absorption of a large number of new members calls for a period of pause and consolidation. The growing indifference and opposition toward the EU among the general public, highlighted by the French and Dutch voters’ rejection of the EU constitution in 2005-2009, lends further support to slowing down the pace of integration. At a broader level, we hope that our study will contribute toward a more multi-disciplinary approach to regional integration among researchers as well as a more multi-dimensional understanding of regional integration among policymakers.

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References

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Capannelli, G., J. Lee, and P. Petri. 2009. Developing Indicators for Regional Economic Integration and Cooperation. ADB Working Paper Series on Regional Economic Integration. No.33. Manila: Asian Development Bank.

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Folders, F. 2000. MERCOSUR: A New Approach to Regional Integration? In Folders, F. and M. Feldsieper, eds. The Transformation of Latin America: Economic Development in the Early 1990s. Cheltenham, UK: Edward Elgar.

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Preusse, H. 2004. The Future of MERCOSUR. In Weintraub, S., A. Rugman, and G. Boyd, eds. Free Trade in the Americas: Economic and Political Issues for Governments and Firms. Cheltenham, UK: Edward Elgar.

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ADB Working Paper Series on Regional Economic Integration*

1. ―The ASEAN Economic Community and the European Experience‖ by Michael G. Plummer

2. ―Economic Integration in East Asia: Trends, Prospects, and a Possible Roadmap‖ by Pradumna B. Rana

3. ―Central Asia after Fifteen Years of Transition: Growth, Regional Cooperation, and Policy Choices‖ by Malcolm Dowling and Ganeshan Wignaraja

4. ―Global Imbalances and the Asian Economies: Implications for Regional Cooperation‖ by Barry Eichengreen

5. ―Toward Win-Win Regionalism in Asia: Issues and Challenges in Forming Efficient Trade Agreements‖ by Michael G. Plummer

6. ―Liberalizing Cross-Border Capital Flows: How Effective Are Institutional Arrangements against Crisis in Southeast Asia‖ by Alfred Steinherr, Alessandro Cisotta, Erik Klär, and Kenan Šehović

7. ―Managing the Noodle Bowl: The Fragility of East Asian Regionalism‖ by Richard E. Baldwin

8. ―Measuring Regional Market Integration in Developing Asia: a Dynamic Factor Error Correction Model (DF-ECM) Approach‖ by Duo Qin, Marie Anne Cagas, Geoffrey Ducanes, Nedelyn Magtibay-Ramos, and Pilipinas F. Quising

9. ―The Post-Crisis Sequencing of Economic Integration in Asia: Trade as a Complement to a Monetary Future‖ by Michael G. Plummer and Ganeshan Wignaraja

10. ―Trade Intensity and Business Cycle Synchronization: The Case of East Asia‖ by Pradumna B. Rana

11. "Inequality and Growth Revisited" by Robert J. Barro

12. "Securitization in East Asia" by Paul Lejot, Douglas Arner, and Lotte Schou- Zibell

13. "Patterns and Determinants of Cross-border Financial Asset Holdings in East Asia" by Jong-Wha Lee

14. "Regionalism as an Engine of Multilateralism: A Case for a Single East Asian FTA" by Masahiro Kawai and Ganeshan Wignaraja

A New Multi-Dimensional Framework for Analyzing Regional Integration: Regional Integration | 19 Evaluation (RIE) Methodology

15. "The Impact of Capital Inflows on Emerging East Asian Economies: Is Too Much Money Chasing Too Little Good?" by Soyoung Kim and Doo Yong Yang

16. "Emerging East Asian Banking Systems Ten Years after the 1997/98 Crisis" by Charles Adams

17. "Real and Financial Integration in East Asia" by Soyoung Kim and Jong-Wha Lee

18. ―Global Financial Turmoil: Impact and Challenges for Asia’s Financial Systems‖ by Jong-Wha Lee and Cyn-Young Park

19. ―Cambodia’s Persistent Dollarization: Causes and Policy Options‖ by Jayant Menon

20. "Welfare Implications of International Financial Integration" by Jong-Wha Lee and Kwanho Shin

21. "Is the ASEAN-Korea Free Trade Area (AKFTA) an Optimal Free Trade Area?" by Donghyun Park, Innwon Park, and Gemma Esther B. Estrada

22. "India’s Bond Market—Developments and Challenges Ahead" by Stephen Wells and Lotte Schou- Zibell

23. ―Commodity Prices and Monetary Policy in Emerging East Asia‖ by Hsiao Chink Tang

24. "Does Trade Integration Contribute to Peace?" by Jong-Wha Lee and Ju Hyun Pyun

25. ―Aging in Asia: Trends, Impacts, and Responses‖ by Jayant Menon and Anna Melendez-Nakamura

26. ―Re-considering Asian Financial Regionalism in the 1990s‖ by Shintaro Hamanaka

27. ―Managing Success in Viet Nam: Macroeconomic Consequences of Large Capital Inflows with Limited Policy Tools‖ by Jayant Menon

28. ―The Building Block versus Stumbling Block Debate of Regionalism: From the Perspective of Service Trade Liberalization in Asia‖ by Shintaro Hamanaka

29. ―East Asian and European Economic Integration: A Comparative Analysis‖ by Giovanni Capannelli and Carlo Filippini

20 | Working Paper Series on Regional Economic Integration No. 49

30. ―Promoting Trade and Investment in India’s Northeastern Region‖ by M. Govinda Rao

31. "Emerging Asia: Decoupling or Recoupling" by Soyoung Kim, Jong-Wha Lee, and Cyn-Young Park

32. ―India’s Role in South Asia Trade and Investment Integration‖ by Rajiv Kumar and Manjeeta Singh

33. ―Developing Indicators for Regional Economic Integration and Cooperation‖ by Giovanni Capannelli, Jong-Wha Lee, and Peter Petri

34. ―Beyond the Crisis: Financial Regulatory Reform in Emerging Asia‖ by Chee Sung Lee and Cyn-Young Park

35. "Regional Economic Impacts of Cross-Border Infrastructure: A General Equilibrium Application to Thailand and Lao PDR" by Peter Warr, Jayant Menon, and Arief Anshory Yusuf

36. "Exchange Rate Regimes in the Asia-Pacific Region and the Global Financial Crisis" by Warwick J. McKibbin and Waranya Pim Chanthapun

37. ―Roads for Asian Integration: Measuring ADB's Contribution to the Asian Highway Network‖ by Srinivasa Madhur, Ganeshan Wignaraja,and Peter Darjes

38. "The Financial Crisis and Money Markets in Emerging Asia" by Robert Rigg and Lotte Schou-Zibell

39. ―Complements or Substitutes? Preferential and Multilateral Trade Liberalization at the Sectoral Level‖ by Mitsuyo Ando, Antoni Estevadeordal, and Christian Volpe Martincus

40. ―Regulatory Reforms for Improving the Business Environment in Selected Asian Economies—How Monitoring and Comparative Benchmarking can Provide Incentive for Reform‖ by Lotte Schou-Zibell and Srinivasa Madhur

41. ―Global Production Sharing, Trade Patterns, and Determinants of Trade Flows in East Asia‖ by Prema–Chandra Athukorala and Jayant Menon

42. ―Regionalism Cycle in Asia (-Pacific): A Game Theory Approach to the Rise and Fall of Asian Regional Institutions‖ by Shintaro Hamanaka

43. ―A Macroprudential Framework for Monitoring and Examining Financial Soundness‖ by Lotte Schou-Zibell, Jose Ramon Albert, and Lei Lei Song

44. ―A Macroprudential Framework for the Early Detection of Banking Problems in Emerging Economies‖ by Claudio Loser, Miguel Kiguel, and David Mermelstein

A New Multi-Dimensional Framework for Analyzing Regional Integration: Regional Integration | 21 Evaluation (RIE) Methodology

45. ―The 2008 Financial Crisis and Potential Output in Asia: Impact and Policy Implications‖ by Cyn-Young Park, Ruperto Majuca, and Josef Yap

46. ―Do Hub-and-Spoke Free Trade Agreements Increase Trade? A Panel Data Analysis‖ by Jung Hur,Joseph Alba,and Donghyun Park

47. ―Does a Leapfrogging Growth Strategy Raise Growth Rate? Some International Evidence‖ by Zhi Wang, Shang-Jin Wei, and Anna Wong

48. ―Crises in Asia: Recovery and Policy Responses‖ by Kiseok Hong and Hsiao Chink Tang

* These papers can be downloaded from: (ARIC) http://aric.adb.org/reipapers/ or (ADB) www.adb.org/publications/category.asp?id=2805

A New Multi-Dimensional Framework for Analyzing Regional Integration: Regional Integration Evaluation (RIE) Methodology

In this paper, Donghyun Park and Mario Arturo Ruiz Estrada propose the regional integration evaluation (RIE) methodology which is based on four dimensions of development – economic, political, social and technological. The central idea behind the RIE methodology is that regional development promotes regional integration. Our RIE methodology differs from the existing literature in that it is based on a more comprehensive definition of development than just economic development. Our definition of a region’s development incorporates the development levels of all regional countries as well as differences in development levels among regional countries. We apply the RIE methodology to assess the integration prospects of NAFTA, ASEAN, MERCOSUR and EU.

About the Asian Development Bank

ADB’s vision is an Asia and Pacific region free of poverty. Its mission is to help its developing member countries substantially reduce poverty and improve the quality of life of their people. Despite the region’s many successes, it remains home to two-thirds of the world’s poor: 1.8 billion people who live on less than $2 a day, with 903 million struggling on less than $1.25 a day. ADB is committed to reducing poverty through inclusive economic growth, environmentally sustainable growth, and regional integration. Based in Manila, ADB is owned by 67 members, including 48 from the region. Its main instruments for helping its developing member countries are policy dialogue, loans, equity investments, guarantees, grants, and technical assistance.

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